Tag: lending

You yearn for your business to survive and thrive. But what if your small business start-up flops, either early or after the business gets big?

There is a way to get limited liability protection So the creditors cannot go after your house, your car, your savings…

Consider Salomon. You might ask, “how can any salmon, no matter how delicious and packed with omega-3 fatty acids, give me limited liability protection?” Even with lemon butter, or teriyaki sauce, or a maple-soy glaze, it seems like too much to ask. Excuse me, I’m getting hungry —

I’m back. Where was I? Oh yes, Salomon, which actually has nothing to do with salmon despite the similar spelling. 

In Salomon v. Salomon & Co. Ltd., [1895-9] All E.R. 33, Britain’s House of Lords saw a corporation created for limited liability. One man owned almost all the shares and ran the business. Even so, the corporation counted as a separate legal entity from him. So it, and not the man, was liable for its debts.

This is still good law today. With a few exceptions, like fraud and some torts, the debts are the corporation’s alone.

Limited liability is not a trick — it is why they invented corporations in the first place.

For limited liability you first have to create a corporation. But just incorporating is not enough for solid protection. You should also organize, maintain, and use your corporation.

Organize

Once you have articles of incorporation you should organize. This includes holding a first directors meeting to make by-laws, appoint officers, and so on. You can ask a lawyer to help you take all the steps — not just those I mentioned.

Maintain

Maintenance includes holding annual shareholders’ meetings, keeping the Minute Book up-to-date, registering changes with the government, and other steps. Again, a lawyer can help.

Use

Use the corporation for your business.

Use its exact legal name on documents. Documents like contracts, purchase orders, invoices, business cards, and letters. If you rarely mention your corporation, creditors will argue that you are personally liable.

Exact Legal Name

When I say “exact legal name”, I mean it. Not a similar name, the exact name.

“Joe’s Fish Emporium” is not the same as “Joe’s Fish Emporium Limited”. The first name does not say there is a corporation. So Joe, or whoever runs the business, might be personally liable. The second name says there is a corporation. Probably there is limited liability.

Do not use “Joe’s Fish Emporium Unlimited” because it sounds cooler than  “Joe’s Fish Emporium Limited.” The word “Unlimited” implies that there is no limited liability.

“Joe’s Natural Fish Emporium Limited” or “Joe’s Fish Emporium Ltd. Corp.” also create risks if the exact name is “Joe’s Fish Emporium Limited”.

Surprisingly often I have seen people use different names from the exact name. They run a needless risk.

Make sure you know the exact name. The articles of incorporation will not always tell you, because the name could have changed. The safest way is to search with the government.

If you want to use a different name — even a little different — change the name properly and register the change.

Lending

Buying shares is not the only way to put money into your corporation. You can also lend money to it. You can even take security for the loan.

This opens up interesting possibilities. I wrote about some in The Bottom Line, a magazine for accounting and financial professionals. To see the article go to: Can Your Client Be Saved By A Private Receivership?

With wise use of a corporation you should not face financial ruin even if an unexpected disaster swamps your business. You could keep eating, and plan your business comeback.

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P. S. My thanks to Paul Tobey of http://www.trainingbusinesspros.com/, who made a suggestion that improved this post.